ENCYCLOPÆDIA BRITANNICA
britannica.com
value-added tax
government levy on the amount that a business firm adds to the price of a commodity during production and distribution of a good. Three major types of value-added tax have been identified, depending on the deductions allowed, but only one--called the "consumption" type--is widely used today.
Calculation of the value-added tax of the consumption type can be made in any of three different ways, but virtually every country imposing the tax uses the "invoice," or "credit," method of computation. Using this method, each seller (the party responsible for collecting the tax and paying it to the government) first calculates the sum of all the taxes that he has collected on goods sold; he then totals the sum of all the taxes that he has paid on goods purchased. His net tax liability is the difference between the tax collected and the tax paid.
It is generally assumed that the burden of the value-added tax, like that of other sales taxes, falls upon the final consumer. Although the tax is collected at each stage of the production-distribution chain, the fact that sellers receive a credit for their tax payments causes the tax, in effect, to be passed on to the final consumer, who receives no credit. The tax can be regressive (i.e., the percentage of income paid in tax rises as income falls), but most countries have at least partly avoided this effect by applying a lower rate to necessities than to luxury items. |
